Magazine

Inside Wall Street

August 27, 2008

Set for a New Round at GameStop

Is the game over for GameStop (GME), the world's largest video game and entertainment software retailer? Judging from its solid results in its fiscal second quarter ended Aug. 2, it's doing very well indeed. So why did the shares sag 5.8%, to 40.99, after GameStop reported a 126% rise in earnings and a 35% gain in sales? Other retailers would die for such gains, especially these days, with consumer spending on the ropes.

A big concern is whether the good times will keep rolling, with rising competition from Wal-Mart (WMT) and Best Buy (BBY) amid an economic downturn. The bulls, however, predict that GameStop's strong winnings will go on. "We expect it will benefit from the video game console cycle that includes next-generation platforms Xbox 360, PlayStation 3, and Nintendo Wii," says Robert Plaza of Zacks Investment Research, who rates the stock, now at 43.10, a buy, with a six-month target of 60. Also, most investors underestimate GameStop's business in used games, which sell strongly and produce higher margins than new games, he adds. Consumers will be looking for games to play on the forthcoming platforms, so strong demand should continue for the next few years. Plaza upped his 2008 earnings forecast to $2.52 a share from $2.42, and his 2009 to $3.20 from $3.01.

ValuEngine in a report to clients recommends GameStop as a buy and figures the stock should trade at 62.83 a share.

Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.

Will an Iron Ace Show Its Mettle?

Concern that the U.S. economic slump will soften the demand for the iron ore used in steelmaking has hammered the stock of Brazil's Vale do Rio Doce (RIO), the world's largest producer of such ore. Vale tumbled to 26.74 on Aug. 27, down from a 52-week high of 44.15 on May 19.

In addition, Vale is a top producer of nickel, following its $17 billion acquisition of Canada's Inco in 2007. Its other businesses include copper, gold, and potash.

David Riedel, president of Riedel Research Group, says the Vale stock decline is an overreaction to near-term economic weakness. A major acquisition is in the works, he says, "which should drive the stock up, and we rate it a buy."

Leo Larkin of Standard & Poor's (MHP), who also rates Vale a buy, with a target of 35, sees sales rising 27% in 2008 after a 64% jump last year. In 2008 he sees profits of $2.86 a share vs. 2007's $2.42.

Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.

Sangamo's Full Plate of Deals

When Big Pharma giants team up with a small biotech, they have usually done lots of research to justify their payments and commitment. That's presumably what Roche (RHHBY)) did when it signed a research and licensing pact with Sangamo BioSciences (SGMO) to use its "zinc finger nuclease" technology. ZFN is a biological tool for modifying genes in human, animal, and plant cells to produce therapeutic agents, says Pamela Bassett of Cantor Fitzgerald, which has done banking for Sangamo.

In February, Genentech (DNA) also signed a pact with Sangamo for ZFN. And in July, Dow AgroSciences (DOW) did the same, for use of ZFN in farm crops. Sigma-Aldrich (SIAL) is Sangamo's exclusive licensee for ZFN research reagents. All these ties with drug giants show that Sangamo, now at 9.63 a share, is undervalued, says Bassett. Her 12-month price target for the stock is 27.

Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.

Marcial writes the Inside Wall Street column for BusinessWeek. In 2008, FT Press published the book Gene Marcial's 7 Commandments of Stock Investing.